SEC: Broker-dealers may have misled on structured products

Washington, DC, July 27, 2011 — The Securities and Exchange Commission staff today issued a report identifying common weaknesses seen in sales of structured securities products and describing measures by broker-dealers to better protect retail investors from fraud and abusive sales practices.

The report summarizes the results of a sweep examination of the retail structured securities products business of 11 broker-dealers, covering a cross-section of the industry. Structured securities products generally do not represent ownership of a particular asset (such as stock in a manufacturing company); instead, the products promise returns to investors based on the performance of one or more underlying assets.

Among other things, the staff observed that broker-dealers might have:

Potential supervisory deficiencies were observed as well. In particular, there appears to have been a lack of training requirements for supervisors and registered representatives that market structured products to their customers. The report contains recommendations for improved surveillance of sales practices and enhanced training for sales and supervisory personnel.

“Sales of structured products to retail investors have increased over recent years and may continue to increase as they are marketed as a higher return investment alternative,” said Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations. “This report could help companies strengthen their compliance programs to better address the issues we observed during our sweep and in subsequent exams.”

Mr. di Florio added, “Beyond this report, we are monitoring the way in which these products evolve, and are considering additional steps in the near future relating to structured securities products that may further bolster investor protection.”

The staff report states that larger broker-dealers should focus on issues such as:

having adequate procedures and controls to prevent and detect possible abuses in the secondary market for structured securities products;